Control Panel: All Assets Rising

Investment Analysis Clubs Macro Economic Trends and Risks
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What does it mean when the prices of all assets are rising together to record highs?

Stocks. The Price-to- earnings ratio based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted P/E Ratio (CAPE Ratio)is over 40, compared with the long-term median of 16.

Bonds, including Treasuries and junk bonds. The junk bond spread is low.

Gold, silver, copper, oil, bitcoin.

Housing.

USD is stable. The Fear & Greed Index is neutral but the trade is risk-on.

The Federal Reserve is shedding assets so the money isn’t coming from the Fed.

The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, shows very loose conditions.

The only way that all assets can rise together is on a wave of borrowed money.

The Shadow Banking System creates lending money through a process known as credit intermediation that operates largely outside of traditional, regulated banks. This is achieved primarily through a combination of maturity transformation and securitization which generates highly liquid, short-term debt instruments that are used as “money-like” funding for longer-term, riskier lending. Shadow banking entities often employ leverage and a process called rehypothecation to magnify their lending capacity.

Remember that this isn’t “real money” like cash. It’s “funny money” that is created without regulation. If the market turns from risk-on to risk-off the demand for long-term loans could evaporate and the value of the loans could go “poof!” overnight. Crashes have followed manias many times before, wiping out both the borrowers and the lenders. (cf. “Manias, Panics and Crashes,” by Kindleberger.)

According to Doug Noland at the Credit Bubble Bulletin:

On the one hand, so long as the AI mania spell holds, underlying sector Credit quality might not play much role. The lack of “private Credit” transparency may remain a non-issue. On the other hand, when the market environment turns south and folks start to fear deteriorating economic, market, and Credit prospects, I expect a much more circumspect view of “private Credit,” leveraged lending, structured finance, and AI-related finance more generally. Q3 exuberance ensured fading memories. But early April provided inklings of things – like risk aversion and deleveraging - to come… [end quote]

Doug Noland’s concern is contagion. That’s what happened in 2007-2008 when failure and default in some sectors of the loan market caused lenders to become more risk averse and raise yields in supposedly safer areas. The spreading risk aversion shows in the Financial Stress chart.

A huge amount of private credit today is opaque and illiquid. The size of the private credit market is estimated to be north of $1 Trillion. The companies list the values at much higher than market prices in many cases so investors (lenders) could panic if they try to withdraw their money only to find that it’s frozen.

At the moment that’s not happening. Financial Stress is very low.

The markets showed virtually no reaction to the government shutdown.

The METAR for next week is sunny. The bubble continues to inflate.

Wendy

https://www.cnn.com/markets/fear-and-greed

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The CAPE ratio has structural limitations and is only truly meaningful in market extremes. Instead of relying solely on CAPE, I encourage you to focus on forward-looking indicators. Key signs pointing to potential growth over the next two to three years include projected forward earnings growth and a shift in CEO sentiment from negative to positive. Historically, this positive shift, especially when combined with the start of a Fed interest rate cutting cycle, signals a period of economic expansion.

Oil prices are low and not high. :slight_smile:

Actually housing is pretty bad, if you just look at housing by itself, it is recessionary. Will the interest rate cut spur housing, and will it become a ‘tailwind’ instead of ‘headwind’??

Actually I view USD is declining, Trade ideas on declining dollar

This is true and the private credit industry is working very hard to make them part of your 401 (k), which is supposed to be a long holding unlike public markets. So just be aware of what your target date funds hold.

I am not expecting a freeze on private credit will/ may have cascading effect, as someone who needs money and cannot access their private credit funds, may end up selling their publicly tradable assets like stocks, or Bitcoin. Hopefully, not every investor will try to exit at the same time, if they are, there has to be a bigger shock to the system.

This is concerning. This is a too good of an opportunity to implement some extreme agenda for Trump. It is not coincidental the national guard deployment in Oregon, Chicago, etc. This is a well established pattern to create multiple crisis, and diluting opposition energy to concentrate their fight on any one issue. Set aside the politics, but longer the shutdown drags, and given Trump’s natural instinct is to unleash chaos, the markets may hit “air pocket”.

I have scaled few positions last week. I was originally planning to push ‘booking profits to 2026’ for tax purposes, now I am debating either to book profits or buy hedges and in the meantime… look below my trading portfolio performance, which is making me pause, because the more cash I raise, I miss out on the potential profits…

The point here is not about me, but I expect many folks are in the same camp, and holding tight and watching nervously… some big players could get out in hurry, that is another potential “air pocket”.

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As Yogi Berra said, “It’s hard to make predictions, especially about the future.”

That’s why I prefer backward-looking measures like CAPE. There are all kinds of reasons why future expectations may not pan out. Especially in times of radical change like ours.

Every bubble in history has inflated on positive sentiment toward the future.

Wendy

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A number of ‘experts’ claim there are Trillions of dollars ‘on the sidelines’ that will be moved into equities, as more investors seek higher returns. AFAIK ‘the sidelines’ are bonds, treasuries, and other fixed-asset instruments.

Electronic Arts is reported to be ‘going private’, and is a glaring example of a publicly traded company being taken private, and therefore out of the publicly traded market.

Over the last few years, several reports have shown that publicly traded companies have declined from about 10k 3 decades ago to about 4k today. While private equity has grown substantially.

Chart generated by ChatGPT:

listed_vs_pe_aum_chart
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The claim is that public investing Dollars are being concentrated into fewer and fewer companies, which drives the price of the available companies up.

:mouse_trap:
ralph

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The sideline they are talking about is in MMF… The money raised by funds that are waiting to be deployed are sitting in MMF. Not in bonds or treasuries, may be bills, but not treasury bonds or other fixed assets.

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Absolutely!!! Greenspan warned about irrational exuberance, on Dec-5-1996, SPX closed the next day at 740 and then proceeded to rally to 1532, that is more than 100% higher… and even after dot com crash, SPX closed at 770…

Even if you are going to be correct in predicting a crash in future, you could be completely wrong on the market performance. Because it is difficult to predict about future…

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With all this stuff going on, can CD’s still be considered to be 100% safe? Or could that money disappear too?

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It could potentially mean the denominator is falling…

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Can you share the 30 year chart for a longer term perspective?

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In theory, they are safe. From perplexity.ai:

Yes, certificates of deposit (CDs) are FDIC insured when issued by an FDIC-member bank, up to the standard limit of $250,000 per depositor, per bank, per ownership category.

If you have more than $250,000 to invest it is wise to get CD’s from multiple banks. Make sure each are FDIC insured as are their CD’s. When in doubt, check with the institution.

Treasuries are also considered safe, though not insured. And they are more liquid than CD’s. Something to consider.

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Yes, I understand what you’re saying about them being insured by the FDIC.

But, from what I’m reading up-thread, is it a sure thing that the FDIC would have the money to pay for defaulted CD’s ?

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Let’s just say this. If the FDIC defaults themselves, we’ve got really, really big problems on our hands. Ditto of Treasuries default. If things like this happen, things have become so bad that my money might be one of the last things I’m concerned about.

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This one has the long term -

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